Start-ups learn the hard way how to manage cash after SVB’s collapse

A week after the collapse of Silicon Valley Bank, a group of venture capital firms wrote to the collapsed start-ups in which they had invested their money. It was time, they said, to talk about the “admittedly not-so-sexy” role of treasury management.

Days of struggling to account for their companies’ funds presented a generation of founders with an uncomfortable fact: Despite all the effort they had put into raising money, few had spent much time thinking about how to manage it.

In some cases, the sums involved were considerable: Roku, the video streaming business, had almost half a million dollars in SVB when the bank began management, a quarter of its funds.

Many others, it transpired, had concentrated all the funding on which their long-term growth plans and looming payroll needs depended in just one or two banks, oblivious to the fact that regulators would insure only the first 250,000 dollars in case of problems. .

The “easy money regime” of recent years allowed relatively immature companies to accumulate unusually large sums of cash that were “far in excess of what they needed,” observed the former chief risk officer of one of the largest US banks, which he asked not to do. be appointed

“The problem here is that the cash seems so large to me relative to the size of the companies,” he said. “Traditionally, people grew into it over time. Nobody would hand over a couple of hundred million dollars to a start-up with 20 people” before the VC-driven start-up boom.

“When the money is flowing, you pay less attention to it,” said David Koenig, whose DCRO Risk Governance Institute trains directors and executives on risk management. It was not uncommon for people who had been successful in growing new things to ignore traditional risks, he added: “Risk to them is something different from what they do in their business.”

The founders, who exchanged notes at the South by Southwest festival in Texas last week, admitted they got a quick education. “We got our MBA in corporate banking last weekend,” said Tyler Adams, co-founder of a 50-person start-up called CertifID: “We didn’t know what we didn’t know and we were all making different but similar mistakes “.

His wire fraud prevention business, which raised $12.5 million last May, banked with PacWest Bancorp and struggled Friday to move four months of payroll to a regional bank where he had kept an account used while opening an account at JPMorgan Chase.

VCs including General Catalyst, Greylock and Kleiner Perkins advocated a similar strategy in their letter. Founders should consider holding accounts with two or three banks, including one of the four largest US banks, they said. Keep three to six months of cash in two core operating accounts, they advised, investing any excess in “safe, liquid options” to generate more income.

“Getting this right can be the difference between survival and an ‘extinction-level event,'” the investors warned.

Kyle Doherty, CEO of General Catalyst, noted that banks like to “cross-sell” various products to each customer, increasing concentration risk, “but you don’t have to have all your money with them.”

William C Martin, founder of investment fund Raging Capital Management, argued that complacency was the biggest factor in start-ups mismanaging their cash.

“They could not imagine the possibility that something could go wrong because they had not experienced it. As a hedge fund in 2008 when we saw counterparties go bust, we had contingencies, but that didn’t exist here,” he said, calling it “pretty irresponsible” for a multibillion-dollar company or venture fund to not have a plan for a banking crisis.” “What’s your CFO doing?” he asked.

Doherty rejected this idea. “Things move quickly in the early stages of a company — the focus is on making the product and delivering it,” he said. “Sometimes people got lazy, but it wasn’t an abdication of responsibility, it was that other things took priority and the risk was always pretty low.”

For Betsy Atkins, who has served on the boards of Wynn Resorts, Gopuff and SL Green, SVB’s collapse is a “wake-up call”. . . that we need to focus more on enterprise risk management.” Just as boards had begun to look at supply chain concentration during the pandemic, they will now look more at how assets are allocated, he predicted.

Russ Porter, chief financial officer of the Institute of Management Accountants, a professional body, said companies needed to diversify their banking relationships and develop more sophisticated finance departments as they grew in complexity.

“It’s not best practice to use just one partner . . . to pay your bills and handle your payroll. But I’m not advocating atomizing banking relationships,” he said.

For example, IMA itself has annual revenues of $50 million and five people in the finance department, one of whom spends two-thirds of her time on treasury functions. He has cash to cover a year’s expenses, and three banks.

Many startups have taken advantage of the availability of private funding to delay rites of passage like initial public offerings, which Koenig noted are often times when founders are told they need to put more professional finance teams in place.

However, finding financial professionals attuned to today’s risks can be difficult. “There’s a shortage of CFOs with experience working in really tough times. They’ve never had to deal with high inflation – they could have still been at university or just started their careers during the Great Financial Crisis,” he said. porter “The skill set required might be changing a bit, from a dynamic, growth-oriented CFO to a more balanced one that can address and mitigate risks.”

There’s another pressing reason for start-ups to get more serious about cash management, Doherty said: The number of companies switching banks has given fraudsters an opportunity to impersonate legitimate counterparts by telling new companies that they transfer money to new accounts.

“We started getting emails from sellers with wiring instructions, ‘you need to update your payments and transfer them to this account,'” Adams added: “In the next few weeks we’re going to see a lot of scammers saying ‘hey, we can take advantage of it.”

Kris Bennatti, a former auditor and founder of Bedrock AI, a Y Combinator-backed Canadian start-up that sells a financial analytics tool, warned of the risk of overreacting.

“To suggest that we should have optimized our finances for the bank failure is absurd to me. This was an extreme black swan event, not something we should have had or anticipated.”

One idea floated on Twitter last week by former Bank of England economist Dan Davies would be for venture capital firms to go beyond providing advice to their investees to provide treasury functions subcontracted

Bennatti was not in favor. “Honestly, I don’t think this is a problem we need to solve and definitely not a service VCs should be offering,” he said. “Letting a bunch of tech bros manage my cash is way worse than letting it hang out at RBC.”

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